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The World of Banking is Shrinking - Around Your Bank Account

This article provides a general overview of the subject. Specific circumstances require professional advice.

In 2008 a banker at UBS in Switzerland pled guilty to helping US taxpayers evade tax. For US citizens and residents ("US Persons"), the world of foreign bank accounts changed as the IRS began taking a much more aggressive position in targeting "US Persons" with foreign bank accounts. First, it targeted other European banks and forced them to name account holders. More recently it has been reported that the US Department of Justice is investigating the Swiss branches of Bank Hapoalim, Bank Leumi and Mizrahi-Tefahot for conduct similar to that of UBS. "US Persons" with accounts in Israeli banks are worried.

Up until early 2010, the IRS – Internal Revenue Service relied on "US Persons" to voluntarily report their foreign accounts. However, seeking to clamp down on tax evasion, in 2011 Obama passed FATCA – the Foreign Account Tax Compliance Act. FATCA took an unprecedented approach to discovering unreported foreign accounts: it forced foreign banks to disclose bank accounts belonging to "US Persons".

Ordinarily, foreign banks are not subject to US law. However, the US can impose restrictions on foreign entities doing or seeking to do business in the United States. Accordingly, FATCA requires foreign banks to disclose accounts of "US Persons" who face severe tax consequences - a 30% withholding tax on US sourced income such banks have. In other words, a foreign bank must decide whether to "name names" or face financial penalties.

The choice is not simple from a confidentiality or administrative point of view. Under FATCA foreign banks must enter into agreements with the IRS that require them to (1) agree to adopt complex procedures to verify if accounts are owned by "'US Persons". (2) Report account information of "US Persons" to the IRS, such as account balances and contributions into and withdrawals from the account. (3) Withhold 30 % on account holders who are unwilling to provide required information.

In terms of identifying accounts of "US Persons", the foreign bank and its personnel must establish complex and detailed processes to prove that an account holder is not a "US Person". The bank can rely on signed statements or other documentation provided to it by a customer. However, the bank cannot rely on this information if it knows that the information is unreliable or incorrect, or if it knows that the person is a US citizen or resident. In other words, if the bank knows that a customer is a "US Person", the bank cannot accept the Israeli passport of the person and ignore the fact that the person is also a "US Person".

With regard to bank account holders who are entities, the situation is slightly more complex. A US entity is deemed a "US Person" for FATCA. However, a non-US entity will also be deemed a "US Person" for purposes of FATCA if it has one or more substantial US owners.

Will your bank name names?

Foreign banks with business in the US will need to decide whether to enter into an agreement with the IRS or divest itself of any US activity. From information obtained from most large and small banks in Israel, the author is advised that all banks are in the process of complying with FATCA. In fact, even foreign banks with no US activity seek to comply with FATCA: it appears that no credible banks want to be labeled as aiding US tax evaders.

What are the FATCA timelines?

The foreign bank must enter into an agreement with the IRS by June 30, 2013. This will allow the foreign bank to avoid the 30% withholding on its US source of income on January 1, 2014.

Within one year of entering into the agreement with the IRS, the bank must complete a detailed investigation of accounts which have more than $500,000 in order to determine whether the owner of the account is a "US Person".

For accounts with less than $500,000, the date by which the bank must complete the investigation is December 31, 2014.

The first deadline for reporting information under FATCA is September 30, 2014.

What options are available to a "US Person" with an undeclared bank account?

As stated above, prior to FATCA, a "US Person" could decide whether or not to disclose the account voluntarily. However, with the IRS investigating Israeli banks and introducing FATCA, the ostrich option of burying one's head in the sand is quickly vanishing. The world of banking is becoming smaller and more transparent. That is a fact.

What should the taxpayer do?

Lawfully, the taxpayer must disclose the foreign account. To encourage tax- payers to voluntarily disclose their accounts, the IRS has instituted voluntary disclosure initiatives, or "Amnesty Programs". Taxpayers who come forward and disclose their accounts during these programs are subject to reduced penalties. Of course, the terms of settlement with the IRS depend on many factors, such as the source and amount of money in the foreign accounts. However, voluntary disclosure remains an option that provides the taxpayer with certainty and closure.

Rather than depend on the will of the taxpayer, the IRS is taking aggressive steps to discover foreign bank accounts. Whether the taxpayer chooses to disclose, be an ostrich or prefer other options such as expatriation, time is of the essence. Post-UBS, the world has changed.

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About the author

Monte Silver, Esq. Drawing on his legal and business experience in both Southern California and Israel, Mr. Silver provides counsel to entities, investors and charities active between the two local...More...